Every Bubble Eventually Finds its Pin

The transfer of wealth from workers and savers to governments and big banks continued this week with Swiss-like precision.  The process is both mechanical and subtle.  Here in the USA the automated elegance of this ongoing operation receives little attention.

NFL football.  EBT card acceptance at Del Taco.  Adam Schiff’s impeachment extravaganza.  You name it.  Bread and circuses like these – and many others – offer the American populace countless opportunities for chasing the wild goose.

All the while, and with little fanfare, debts pile up like deadwood in Sequoia National Forest.  These debts, both public and private, stand little chance of ever being honestly repaid.  According to the IMF, global debt –  both public and private – has reached an all-time high of $188 trillion.  That comes to about 230 percent of world output.

Certainly, some of the private debt will be defaulted on during the next credit crisis and depression.  But when it comes to the public debt, governments do everything they can to prevent an outright default.  Central banks crank up the printing press and attempt to inflate it away.

After Nixon temporarily suspended the Bretton Woods Agreement in 1971, the money supply could be expanded without technical limitations.  This includes issuing new debt to pay for government spending above and beyond tax receipts.  Hence, since 1971, government directed money supply inflation has been the standard operating procedure in the U.S. and much of the world.

Downright Disgraceful

Expanding the money supply has the effect of dissipating wealth from the currency.  The process allows governments, which are first in line to spend this newly created money, a back door into your bank account.  Without levying taxes, they get access to your wealth and future earnings and leave you with money of diminished value.

As the money diminishes in value the price of goods and services appear to increase.  This rise in prices, however, is a function of the currency devaluation.  This devaluation is primarily achieved via deficit spending.

Of course, when deficits are financed by central bank money printing something downright disgraceful is going on.  Alas, in the U.S., as in much of the world, this disgraceful undertaking is a matter of policy.  This is the world we live in.

If you recall, the Fed recently recommenced QE (though it’s not calling it that).  Under this current iteration, the Fed’s buying Treasury bills of up to $60 billion a month through at least the second quarter 2020.  At that pace, the Fed’s on track to swell its balance sheet to a new all-time high over $4.5 trillion.

By this, the Fed is buying tens of billions of dollars in government debt every month.  They pay for it with newly created dollars.  These dollars are deposited in the Washington’s accounts at the big commercial banks.  The government then does something remarkable with this money that was created from nothing: They spend it!

What’s more, as money is debased, the process of earning, saving, and building wealth is also debased.  Before long, it degenerated into gambling and speculation.  Yet, at the same time, many caught up in the gambling game don’t recognize it for what it is…

Every Bubble Eventually Finds its Pin

Passive investors had plenty to be grateful for when they sat down to their Thanksgiving feast last week.  S&P 500 ETFs were up 27 percent year-to-date.  Plus, a Santa Claus rally’s almost guaranteed to bring good cheer through the end of the year.  Another year or two like this and these shrewd indexers will be able to retire a decade early.

Burgeoning paper wealth has provided an attractive cover for increasing risk and fragility.  Gambling on the market, and extrapolating current trends to determine one’s exact retirement date, is much more rewarding than sacrificing short term gains to protect against large, portfolio destroying losses.  Why worry when the “Powell put” is firmly in place should the market stumble?

After a decade long bull market run, U.S. investors have grown complacent.  A quick gander at a price chart of the S&P 500 over the last 40 years provides ample evidence that stocks always go up over the long term.  And there’s no shortage of popular – and mindless – reasons why the good times won’t continue…

The stock market isn’t a bubble, you see, it’s merely climbing a wall of worry.  Or, bull markets don’t die of old age.  And, don’t forget, the bull market isn’t over until the last bear capitulates.

But what if the stock market isn’t climbing a wall of worry after all?  What if it’s a massive bubble that indexers are fully invested in?  What will come along and pop it?

Ultimately, it really doesn’t matter what pops it.  Every bubble eventually finds its pin.  When this bubble pops, like all bubbles pop, the remaining wealth of workers and savers, goaded into the market by Washington’s policies of mass dollar debasement, will die a painful death.

No doubt, traversing the final crack-up is a harrowing endeavor.

Sincerely,

MN Gordon
for Economic Prism

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